Accounting for capital gains as active business income on S7

T2
1

My client, a CCPC who is not in the financial services sector, keeps short-term working capital in a fixed income ETF that makes no income distributions (capital gains on sale only - HSAV.TO).

My understanding is that since these capital gains are therefore ABI they should not reduce the income eligible for small business deduction.

I can’t for the life of me figure out how to accomplish this on the S7.

Does anyone have any insight? Thanks in advance!

2

Enter the gain on schedule 6. Make sure schedule 1 shows a deduction for gain on sale of assets, as the sch.6 taxable gain will automatically be added back on sch.1

4

Thanks for the reply! I do have the gain on S6 and the deduction on S1.

What I’m confused on is what do I do with amount V in Part 6 of S7 (Taxable capital gains from line 113 of Schedule 1)? Or line 002 of S7 (The eligible portion taxable capital gains included in income for the year)?

These amounts then cascade down to impact T2 lines 400 and 440…

5

So if you’re trying to justify short-term capital gains as ancillary to ABI, why are you referring to S7?

6

There is some passive investment income as well, so the S7 is needed for that.

Is your implication that the ABI amounts just don’t need to go on S7? I.e. instead of reporting all of line 113 of Schedule 1 for amount V of Part 6, subtract the ABI first?

7

That’s exactly what I’m implying.

ABI is ABI, it’s treated as such.

For future reference, client should avoid TCG bearing instruments when carrying WC and stick to either money market or short-term interest bearing instruments. TCG has the interpretation of intent to realize a profit as defined by the CRA and the courts. It’s really hard to argue as being ancillary to business income.

2 Likes
8

Thanks, that all makes sense.

Sounds like it will be best to just treat it as passive investment income in that case.

My understanding is HSAV is based on interest-bearing deposit accounts, but via a swap to convert to capital gains. So perhaps the after-tax yield is still better even with the passive income impact. Not my decision to make!